The first private company to run an NHS hospital will rake in £2m from any
surplus which could lead to "eye watering" cuts, according to details of its
contract.

Labour claims the arrangement will lead to a reduction in frontline services at Hinchingbrooke hospital in Cambridgeshire, which was taken over by Circle in February.

The contract to run Hinchingbrooke, which has debts totalling almost £40 million, was won by Circle last year after NHS bidders pulled out.

The firm, run on a partnership model similar to that of John Lewis, the department store, agreed a 10-year contract, but details were kept secret.

However, the Health Service Journal obtained a letter from Lord Howe, the Health Minister, to Lord Haskel, a Labour peer, in the House of Commons library showing how any surplus would be split between profit for Circle and paying back the NHS debt.

Lord Howe explained that the first £2 million of surplus in any financial year would go straight to Circle, while it would take a quarter of surpluses between £2 million and £6 million, and a third between £6 million and £10 million.

It means that, to pay back the £39 million debts over a decade, Circle must make annual surpluses of at least £10 million for seven years.

Andy Burnham, the Shadow Health Secretary, said: "The Prime Minister has put profit-making before patients; it's a bad deal for the NHS and people will struggle to understand it. If it was to be played out across the system, we would see millions siphoned out of the NHS.

"The Hinchingbrooke deal gives Circle a financial incentive to make eye-watering cuts and the onus is on the Government to ensure they have not compromised the quality and safety of patient care."

Christina McAnea, head of health at Unison, said: "The hospital was already struggling, but the creep in of the profit motive means cuts will now be even deeper.

"Whilst this hospital was the first to be transferred into private hands, it may not be the last."

However, Ali Parsa, chief executive of Circle, said Hinchingbrooke was forecast to keep losing "many tens of millions" if it was kept under direct NHS management.

He told the BBC: "We have been tasked to stop taxpayers losing this money. Our plan is not only to do this and make the hospital sustainable, but to turn it into one of the best district general hospitals in the country.

"Only when we succeed in our ambitious goal will there be rewards to share fairly between our partnership, which includes Hinchingbrooke staff, our start-up backers and the local health economy."

He also said clinical performance and efficiency had already started to improve, going from the longest accident and emergency waiting times in Cambridgeshire to the shortest, and reducing the average stay for hip and knee patients by 2.1 days.

If Hinchingbrooke makes a financial loss, Circle must pick up the tab for the first £5 million, according to the Department of Health.

A spokesman said: "Far from simply making a profit, Circle have already set out that they plan to repay the trust's past deficit of £39m.

"Not only are they heavily incentivised to do this by receiving a share of any surplus over £2 million, but they must also fund the first £5 million of any losses while they are managing the trust.

"Any fee that Circle receives isn't all profit – Circle must meet the ongoing cost of delivering the deal and indeed any costs they incurred in bidding for the contract.

"This process, which was started under the previous government, will deliver improved patient care and will put the hospital on a sustainable financial footing for the future."